July 23, 2007

States and Markets

Filed under: Economics, Politics — duncan @ 12:53 pm

This really is too obvious and boring to need saying; but we’re on the very basics. So take a look at this quote from Balaam & Veseth’s ‘Introduction to International Political Economy’: (a thoroughly meretricious book; I should never have bought it.)

“Much of the study of IPE focuses on the interaction of two highly important social institutions: states and markets…. Robert Gilpin, for example, has defined political economy as ‘the field of study that analyzes the problems and questions arising from the parallel existence and dynamic interaction of ‘state’ and ‘market’ in the modern world.’… The parallel existence of states (politics) and markets (economics) creates a fundamental tension that characterises political economy. States and markets do not always conflict, but they do overlap to such a degree that their fundamental tension is apparent. The tensions created by their differing interests or values can be resolved in different ways at different times, but the underlying conflicts remain and reappear throughout human history… States and markets embrace different basic values. They work in different ways to achieve different ends.” (pgs. 13-14).

This is an unwisely bald statement of an idea that you find all over the place: that there is fundamental conflict between state and market. A (slightly) more sophisticated version of it can be found in, for instance, Milton Friedman’s ‘Capitalism and Freedom’. But the idea is pervasive.

A lot of the time, this idea is used to denigrate the state and commend the market. We all know the routine: state power is more or less inherently oppressive – a large state is the first step on a road to serfdom – and so the market really ought to be given the largest role possible in our political and social life. The leftist argument is equally familiar: markets are notoriously poor at providing general social goods, and notoriously heartless in their treatment of the losers in market competition. These are the good old trustworthy battle lines of left versus right, big versus small government, high versus low taxation, interventionism versus laissez faire.

But the opposition between state and market, while plainly useful and valid in spades, is a very blunt tool. For one thing, it has a tendency to understate their interdependence. Balaam & Veseth: “The interaction of states and markets is dynamic, which means it changes over time. In particular, states influence markets and markets influence states, constantly changing the pattern of interests and values that political economists study.” (p. 14). But, of course, states and markets do more than influence each other: they constitute each other. The ‘state’ and the ‘market’ are so intertwined that trying to separate them into two opposing forces is a brutal piece of oversimplification.

Here’s Friedman: “How can we benefit from the promise of government while avoiding the threat to freedom? … First, the scope of government must be limited. Its major function must be to protect our freedom both from the enemies outside our gates and from our fellow-citizens: to preserve law and order, to enforce private contracts, to foster competitive markets.” (Capitalism and Freedom, p. 2).

Now, in the first place, the roles Friedman mentions are already both substantial and paradoxical. Consider preserving law and order: this may seem like a minimal state role; but since our laws are already the codification of an overwhelmingly complex set of social norms, just preserving law and order brings the state into virtually every aspect of our lives. Lest we forget, the preserving of law and order is fundamentally based on the state’s ability to punish its citizens (which includes, in the case of the United States, the ability to kill them). The most important form of punishment is imprisonment: the state has the right to take away a citizen’s freedom. And this removal of freedom is what Friedman calls the protection of freedom. The paradox is eternal; it need not detract from the cogency of Friedman’s argument; but it is troubling that Friedman doesn’t confront it. This alone should give us pause before endorsing Friedman’s bold claims about the relation between capitalism and freedom.

Just as important, however, is the state’s role in the fostering of competitive markets. Everyone knows that a market economy would be impossible without massive political power to back it up. But the easy opposition between state and market all too often slides into the idea that political power is the enemy of markets. This is part of a more general blindness: a failure to see just what a complex and contingent social construction the ‘free market’ is. The economist’s vision of independent atomic individuals, interacting on principles of rational self interest, is fundamentally opposed to a careful investigation of the social bonds that are utterly essential to the phenomena economists describe. A market economy is not a state of nature; it is not even an inevitable product of a society governed by the rule of law. It is the product of centuries of history, and any economics that fails to trace its genealogy will also fail to understand it.

This stuff isn’t abstract. The textbook case, perhaps, is the transformation of Russia that followed the fall of communism. God knows I know little enough about this. But I hope it’s fair to say that neoliberal economists tried to create a full market economy in Russia without understanding that such an economy would not function as it should without massive social, political and regulatory transformations. Result: chaos – a direct product of a flawed view of the independence of the market from political process. However useful the opposition between state and market may be, if it is made in too simplistic a way – as it frequently is in economics, and in many political views that call on economics for support – it leads to stupid politics and stupid economics. Which in turn lead to actual, real world disaster.

Of course everything I’ve said here is itself simplistic and dumb. But never mind. Once more, with nuance.

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